New USDA study looks at impact of end of direct payments

In a new study, the USDA’s Economic Research Service has found that, “an abrupt end to the direct payment program could reduce the number of farms with a favorable financial status ... by about 11,000 nationally, or about 2 percent of farms that received direct payments in 2009.
The estimated effect varies regionally and is more pronounced in the Delta and Southeast regions.

Unless drastic changes are made to the Senate and House Agriculture Committee farm bills, direct payments will be a thing of the past.

In a new study, the USDA’s Economic Research Service has found that, “an abrupt end to the direct payment program could reduce the number of farms with a favorable financial status (profitable farms having relatively low debt burdens) by about 11,000 nationally, or about 2 percent of farms that received direct payments in 2009. The estimated effect varies regionally and is more pronounced in the Delta and Southeast regions, where direct payments per farm tend to be higher, on average, than elsewhere.”

A summary of the study can be seen here[4] and the full report here[5].

The actual analysis, says Jennifer Ifft, one of the study’s authors, “didn’t take that long. However, the whole process took over a year. When we do reports for the USDA there are several layers of review, editing and whatnot.

“The original motivation was it seemed like there wouldn’t be direct payments in the next farm bill. That (leaning by lawmakers) had been going on for a year, or two.”

With direct payments in jeopardy, “we wanted to use data on hand to conduct the study,” says Ifft. That included the ARMS (Agricultural Resource Management Survey[6]) survey, which contains confidential farm income data as well as a lot of regional data.

“We wanted to lay out the magnitude of direct payments,” says Ifft. “How big are they relative to land values and to revenues at the regional level? What could the potential financial impacts on farms be?”

Among the ERS findings:

• About 21 percent of farms received direct payments, which averaged $8,700 per direct payment farm in 2009.

• Relatively more direct payment farms were in a stronger financial position in 2009 than farms that did not receive direct payments.

• ERS findings indicate that most shifts in financial status for direct payment farms from elimination of direct payments would be a result of lost income and not from lower farmland values.

• Direct payment farms in the Delta and Southeast regions would be most affected by an end to direct payments, which would cause about 13 percent of Delta direct payment farms and 10 percent of Southeast direct payment farms that had favorable status in 2009 to lose this status. These farms would see the most impact because direct payments per farm are higher, on average, in these regions.

Among Ifft’s comments regarding the study:

On the categories farms fall into in the analysis…

“There are four categories of financial status that we use. These are very standard and take into account the balance sheet, the solvency, and income levels.

“‘Favorable’ is a positive net farm income and a debt-to-asset ratio of less than 0.4 (percent).

“‘Marginal’ income is where you have negative farm income with a debt-to-asset ratio of less than 0.4 (percent).

“‘Marginal solvency’ is where you have positive farm income and a debt-to-asset ratio that’s greater than 0.4 (percent).

“‘Vulnerable’ farms have both negative farm income and a debt-to-asset ratio higher than 0.4 (percent).”

I think many readers will be surprised that you’ve found an end to direct payments won’t make that big a difference on many farms. However, you also found the Delta is one of the regions that would be hit the hardest. Can you talk about the Delta region and the Southeast specifically?

“These farms have higher levels of direct payments on average. If you look at 2009 data and take away direct payments, you’d have 13 percent of Delta that would lose ‘favorable’ status if they already had it. Ten percent in the southeast (would lose ‘favorable’ status).

“One thing we found is direct payments are higher, per acre, for cotton, peanuts and rice. Of course, those crops are grown in the Delta and Southeast.

“Also, we looked at direct payments as a share of revenue from program crops – from 2004 through 2008 – it’s in the range of 7 percent in the Delta and Southeast. That’s a substantial share of revenues in these regions and is relatively more important there.”

On the effect of ending direct payments on land values…

“This is something that’s more difficult to measure. We looked at something called ‘the share of capitalized direct payments relative to cropland values.’

“It’s a bit tricky. ‘Capitalized direct payments’ is the present value of all future direct payments assuming they continue indefinitely. That’s an estimate of the contribution to land values. And we know this is a maximum – we don’t think the total impact would be so high.”

In the Delta, “direct payments are relatively higher in relationship to the land values. We don’t see this in the Southeast as much, which could be due to having more urban influence on land values.

Did you take into account the size of farms? Say, 500 acres versus 5,000 acres?

“No. We’d probably have run into sample size issues with the ARMS analysis.

“One thing we did do, though, is limit the analysis to ‘farm businesses.’ A ‘farm business’ is where farming is the primary occupation of the primary operator.

“Farm businesses make up less than half of all farms in the United States. ‘Rural residence farms’ make up a much larger share. However, farm businesses account for over 80 percent of production.”

Anything else?

“We try to mention quite a bit that we’ve used data from 2004 to 2009 in the analysis. Some regions have seen significant increases in income since then – the Corn Belt, the Plains region. In those areas, the impact of an end to direct payments might not be as much as our estimates.”